Following a volatile week that began with reignited economic headwinds from the Omicron variant, as well as hawkish commentary from Federal Reserve Chair Jerome Powell, all four major U.S. equity indexes finished the week in the red. 

We chalk much of the pullback to Omicron, which injected a fresh round of uncertainty into the market, and as we've discussed with subscribers that resulted in a "shoot first, ask questions later" that weighed on a number of sectors over the last week. Stoking those concerns were renewed travel restrictions, mask mandates and other measures, some of which are likely to curb demand for travel and leisure, and present renewed headwinds to other parts of the economy depending on what we soon learn about the effectiveness of existing vaccines against the Omicron variant. In the coming days the World Health Organization is expected to share its efficacy findings. If the existing vaccines are found to be effective, odds are we will see investors breathe a sigh of relief and stocks will rebound. If not, or if we need an Omicron-specific vaccine, we are likely to see that "shoot first, ask questions later" mood return.

While all major averages finished the week in the red, if you look under the hood you will see the Nasdaq, which contains a lot of of the future-earnings names, was the hardest hit. Powell comments resulted in expectations for higher longer-term interest rates over time and therefore a contraction in the multiples investors are willing to pay for longer duration stocks.

Our strategy:

While the averages are only single-digit percentage points off their highs, there has been a lot of carnage under the surface and that is where we as stock pickers see opportunity. As we noted multiple times throughout this week, we are eyeing stocks with strong free cash flow generation and shareholder friendly capital return programs because companies with strong balance sheets, healthy dividend payments, and consistent share repurchase programs are typically ones that can withstand and find support in volatile markets.

Many companies in our portfolio routinely repurchase stock and increase their dividend payments year after year. These are traits we look for in many of our investment decisions. Below we have highlighted three names who have all announced new and improved capital return programs just in the past week.

Even on Friday's ugly tape, Nucor (NUE) shares were on the rise after the company announced Thursday night a 23% increase to its quarterly cash dividend. The announcement marked the 49th consecutive year that Nucor has increased its regular, or base, dividend. Nucor’s updated annual dividend payment is now $2 per share, putting the yield at about 1.8%. On top of the dividend announcement, Nucor said its Board approved a repurchase program of up to $4 billion. The new authorization replaces the previously authorized $3 billion program, under which $2.33 billion of stock had been repurchased from May through Dec. 1.

The newest initiation in our portfolio, Chevron (CVX) recently raised its share buyback guidance range to $3 billion to $5 billion per year from prior guidance of $2 billion to $3 billion per year. In our initiation post, we mentioned that it was only a matter of time until management increased its buyback activity. Remember, Chevron’s focus on capital and cost discipline means that the majority of the excess cash they generate will be returned to shareholders via dividends and buybacks. And how can you not appreciate the 4.67% dividend yield, which as of Friday is 3.6x more than the 10-Y Treasury.

Chart Of The Week - Larry Williams Seasonality Chart

December has started off on a weak and volatile note, as market volatility measured by the CBOE Volatility Index rose further, up more than 75% over the last few weeks. Crystalizing the investor mood, the CNN Money Fear & Greed Index has fallen to "Extreme Fear" at a reading of 20, down from "Fear" a week ago and Extreme Greed a month ago. We want to note to subscribers: this is when the saying "buy low, sell high" works the best. We want to utilize the fear in the market to our advantage, finding bargains on stocks which we have long-term horizons on. Just a quick example, on Friday, Ford Motors (F) announced that it has already received 200,000 reservations for its electric F-150 Lightning, up from the 50,000 when the company announced earlier this year in May. However, the stock got sold off nearly 4%, solely because the entire market was down. We used this as a buying opportunity, a situation in which the stock price is lower than when the good news was announced.

To instill some confidence for investors as we head into the year end, we want to bring to you a charting segment. This is work from legendary technician Larry Williams, and was reported by Jim Cramer on CNBC Mad Money.

To top off the charting segment of this week, let's take a final look at the chart of the S&P 500. Perhaps subscribers are more familiar with this type of analysis, as we have often done it here.

To summarize, historically we're about to enter a seasonally strong period for the stock market, typically mid-to-late December, often called a Santa Claus rally. To get second confirmation, look for a turnaround in the currently downtrend Advanced-Decline Indicator. To get third confirmation, look for a bounce off the trendline for the SPX chart.

Bottom line, multiple pieces of evidence are pointing to a reversal and year-end rally for stocks. We suggest investors may have to hold their nose and buy on the days ahead, especially if we get repeats of days like Friday when the entire market was down big. However, a word of caution also has to be said: if the market exhibit failures to hold key indicators, it may be time to get out. Our job here will be to keep a close watch for you, and we will alert you if that is the case.

Good luck and have a great trading week ahead!